SH 2015 Q2 1 ICRA Construction

7/25/2019 SH 2015 Q2 1 ICRA Construction

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ICRA RESEARCH SERVICES

Corporate Ratings

Contacts:

Rohit Inamdar

+91 124 4545 847

[email protected]

Shubham Jain

+91 124 4545 306

[email protected]

Abhishek Gupta

+91 124 4545 863

[email protected]

Rajeshwar Burla

+91 40 4067 6527

[email protected]

April 2015

Indian Construction and Infrastructure Sector

Revival expected with measures to ease project funding;

Initiatives like InvIT are long term positive and can revive private sector participation
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Sector Feature: Construction and Infrastructure April 2015

WHATS INSIDE?

1. Overview

2. Trends: New Projects and Projects under Implementation

Trend in Construction GDP/GVA and GFCFExecution-related stresses continue with implementation-stalled projects at high levels though pace of stalling has slowed

3. Governments reform initiatives and focus on infrastructure

Major initiatives undertaken like relaxation of FDI norms, diesel deregulation, coal block allocation

4. Funding Issues for the Construction/infrastructure sector

Trend in Banking credit to infrastructure sector

Measures taken to support infrastructure financing from banks

Other avenues explored for funding infrastructure projects l ike Infra Debt Fund and InvITs

5. Performance of Companies in the sector

6. Outlook for the sector

7. Focus Area: Infrastructure Investment Trusts (InvITs)

8. Quarterly performance trend of publically-listed construction / infrastructure companies

Consolidated Construction Consortium Limited

ERA Infra Engineering Limited

Hindustan Construction Company Limited

NCC Limited

Pratibha Industries Limited

Sadbhav Engineering Limited

Simplex Infrastructures Limited


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Overview

The construction/infrastructure sector is likely to get major boost from the Governments focus on

development of infrastructure in India. While the recovery in the sector is likely, it would be gradual as

majority of players are still burdened with leveraged balance sheets and stalled or slow moving projects.

Furthermore, if structural constraints like uncertainty in land acquisition, delays in approvals, and inadequacy

of long term funding avenues are not tackled swiftly, the project implementation on the ground may notgather momentum, thereby delaying recovery in the infrastructure sector. In addition, aggressive bidding in

the past and inability or limited ability to raise equity for BOT projects have also impacted viability of

infrastructure projects. These impediments need to be overcome for project implementation to gather pace.

Difficulty in achieving financial closure and overall weak macro-economic environment had also reduced the

risk appetite of developers towards new projects. These factors, amongst others, have resulted in relatively

modest growth in Gross Fixed Capital Formation (GFCF) and Construction GVA (Gross Value Added) in 9m-

FY15. With the political stability, sharper focus on infrastructure development and improvement in economy,

new projects announcements by both the public and private sector are likely to pickup in FY16.

Movement in Stalled Projects

The quantum of stalled projects continued to remain high during FY15 though the pace of new projectstalling came down and revival of stalled projects increased in H2FY15. In January 2013, Project Monitoring

Group (PMG) was set up in the Cabinet Secretariat to help such projects, both in the public and private

sectors, by way of support in clearing the implementation bottlenecks. Till March 2015, PMG had accepted

511 projects with estimated investments of Rs. 25.4 trillion which were facing implementation hurdles. With

the help of Cabinet Committee on Investment (CCI) issues related to 204 such projects worth Rs. 7 trillion

have been resolved as per PMG data. However, another 307 projects with an investment of Rs. 18.4 trillion

are still facing various bottlenecks which is impacting their progress. Apart from reviving stalled projects,

plans to award major projects after acquiring land and requisite approvals under the plug and play model will

significantly reduce execution delays and also attract higher private sector participation.

Steps taken towards easing funding issues in Infrastructure sectorMany steps have been taken to improve funding avenues to the infrastructure sector. The key policy

measures include easing of FDI norms for Construction, Railways, and Defence, liberalization of ECB policy,

and providing incentives to promote REITs and InvITs. RBI has also taken multiple steps to ease funding

availability to infrastructure project. Some of the key ones include providing incentives to banks in the form

of exemption from CRR/SLR for long term bonds raised to lend to infrastructure sector, flexibility in

refinancing norms for infrastructure projects by way of 5/25 structure etc. Besides, the Union Budget has also

allocated higher funds towards public sector infrastructure projects.

Provisions for Infrastructure sector in Budget 2015-16

In the Budget 2015-16, the capital outlays for roads, and railways have been increased by Rs. 140.3 billion

and Rs. 100.5 billion respectively which along with significantly higher Road Cess will enable higher public

Governments reform and

infrastructure building initiatives

helping the sector though on-ground

challenges remain

Resolution of sizeable stalled

projects could provide fillip to the

construction sector

Steps taken to ease Infrastructure

funding issues

Budget 2015-16 laid focus on

infrastructure development


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spending towards these infrastructure projects. In total, investment in infrastructure is proposed to increase

by Rs. 700 billion in FY16 (BE) over FY15 (RE). Recognizing the need of reviving private sector participation in

infrastructure projects, Budget has proposed rebalancing of risks in PPP projects with Government taking up

major risks, appointing an Expert Committee for analysing the possibility of and replacing multiple prior

permissions with a pre-existing regulatory mechanism, and rationalizing dispute resolution mechanism. The

budget also proposes to set-up 5 UMPPs totalling 20 GW in the plug-and-play mode wherein all clearances

and linkages will be obtained before the award of project. It has also announced its intent towards some

large infrastructure projects like building 100 smart cities and Sardar Patel Urban Housing Mission, which willprovide long term infrastructure opportunities. In the railways sector, the focus is on faster execution of

Dedicated Freight Corridor (DFC) which is an important on-going project.

Performance of Construction Companies

The growth in operating income of construction companies (ICRA sample of 15 exchange-listed construction

companies) during this period had remained muted which implies that execution is yet to pick up in a

meaningful manner. This can be partly attributed to stretched financial position of many construction

companies which has constrained resources for speeding up execution. In terms of profitability however,

there has been gradual improvement observed in 9m-FY15, led by subsiding cost pressures particularly on

subcontracting, raw-material and labor related costs. While the sustainability of improvement in operating

profitability remains to be seen, without ramp-up in the scale of operations, the operating profits will not besufficient to cover the interest expenses for most of the construction companies as has been the case in the

last six quarters. The interest coverage ratio for sample of 15 companies had improved marginally to 0.62

times in Q3FY15 from 0.42 times in Q2FY15. The reversal in the interest rate cycle and lowering of interest

rates will help ease the debt servicing burden; however, this alone will not be sufficient for improving credit

metrics. Any significant improvement in liquidity profile and credit metrics of construction companies will

take time and will be contingent on improvement in working capital cycle (by way of faster execution and

release of stuck receivables/retention money), improvement in pace of execution and ability to raise long

term funds by way of stake sale or equity placements. Some large players have raised and many are planning

to raise funds via Qualified Institutional Placement (QIP)/Rights Issue/warrants/preference shares or sale of

stake in subsidiaries.

Outlook

The recovery in the construction sector is expected to be gradual and would be linked with on-ground impact

of the policy measures as well as availability of funding. With high leverage, ability to raise funds via stake

sale in subsidiaries, monetization of assets, or dilution of equity will be key in improving liquidity and capital

structure of construction companies that have been aggressive in the BOT space in past. Many companies

including GMR Infrastructure, Jaiprakash Associates, NCC Ltd, IVRCL etc. have either raised or have plans of

raising funds through equity route like Qualified Institutional Placement (QIP)/Rights

issue/Warrants/Preference shares or sale of stake at the SPV or holding company level to reduce overall

indebtedness at the Group level. The likely reversal in the interest rates cycle would also provide some

respite.

Gradual improvement in

profitability, though growth in

operating income remains muted

Weak cash flows and leveraged

balance sheets continue to pose

challenges for many construction

and infrastructure players


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Focus Area: Infrastructure Investment Trusts

In order to improve funding options, alternate funding sources like Infrastructure Debt Funds (IDFs),

Alternate Investment Funds (AIFs) were introduced in the past to tap into other source of savings like

Insurance and Pension Funds so as to accelerate and enhance the flow of long term funds. In this regard, the

recent initiative in the form of Infrastructure Investment Trusts (InvITs) may help in channelising long term

funds into the sector and in releasing developers capital for further deployment in new projects. Moreover,

InvITs could play a pivotal role in providing wider long-term refinance avenue thereby providing headroom

for banks for new funding requirements.

InvIT is proposed on the same lines as Real estate Investment Trust (REIT) and are dedicated towards

infrastructure sector. However, in comparison to REIT, the capital appreciation aspect is limited in the case of

InvITs as majority of the infrastructure assets have a f inite life and low residual value at the end of the project

life (except the accumulated cash). Unlike REITs where the investors also benefit from capital appreciation,

the NAV of an InvIT is expected to decline gradually over the concession period of the underlying asset unless

there is significant increase in revenues like toll collections in case of a toll road project. Due to this, the

annual yield offered by an InvIT includes partial return of capital deployed by investors into InvIT. The

marketability of InvITs will depend on the effective yield (adjusted for NAV) which can be offered. InvITs will

face competition from REITs and other fixed-income products as well as high dividend-yield stocks.

Investors in InvITs will benefit in the form of better liquidity by virtue of being publicly traded, while Sponsors

will have better scalability (fund raising through follow-on offers) and access to capital markets. The

challenge now is to make InvITs a more attractive option for parking operating infrastructure assets. This in

turn will increase the ability of developers to undertake more infrastructure project development. The

success of InvITs also depends on tax regime. As majority of the infrastructure projects are developed on PPP

(Public Private Partnership) framework, they can only be indirectly held by InvIT through stake in the SPV

holding the project. However, as taxation for SPVs are not pass-through and SPVs have to pay corporate and

dividend distribution taxes, the efficiency of distribution of profits is constrained. Some respite in case of

infrastructure projects can be the ten year tax-holiday which could result in savings during this period.

Furthermore, some efficiency can be brought in by leveraging the SPV by way of InvIT infusing funds in SPV in

the form of debt.

The path for establishing REIT/InvITs has not been easy in other Asian countries also as it takes time to gain

market acceptance. For an investor, InvIT provides opportunity to own a different asset class, though

adjusted returns would be the key criterion for inflow of money towards InvITs. The success of InvIT in Indian

context will also depend on alternatives available for sponsors as well as valuations and taxation aspects.

InvITs can act as a longer term

funding alternative for infrastructure

sector


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Please contact ICRA to get a copy of this report

CORPORATE OFFICE

Building No. 8, 2nd Floor,

Tower A, DLF Cyber City, Phase II,Gurgaon 122002

Ph: +91-124-4545300, 4545800

Fax; +91-124-4545350

REGISTERED OFFICE

1105, Kailash Building, 11th

Floor,

26, Kasturba Gandhi Marg,

New Delhi110 001

Tel: +91-11-23357940-50

Fax: +91-11-23357014

CHENNAI

Mr. Jayanta Chatterjee

Mobile: 9845022459Mr. Leander Rayen

Mobile: 9952615551

5th Floor, Karumuttu Centre,

498 Anna Salai, Nandanam,

Chennai-600035.

Tel: +91-44-45964300

Fax: +91-44-24343663

E-mail:[email protected]

[email protected]

HYDERABAD

Mr. M.S.K. Aditya

Mobile: 99632537774A, 4

thFloor, Shobhan,

6-3-927/A&B, Rajbhavan Road, Somajiguda

Hyderabad 500 082.

Tel: +91-40-40676500

Fax: +91-40- 40676510


MUMBAIMr. L. Shivakumar

Mobile: 9821086490

3rd Floor, Electric Mansion,

Appasaheb Marathe Marg, Prabhadevi,

Mumbai - 400 025

Ph : +91-22-30470000,

24331046/53/62/74/86/87

Fax : +91-22-2433 1390


KOLKATAMs. Vinita Baid

Mobile: 9007884229

A-10 & 11, 3rd Floor, FMC Fortuna,

234/ 3A, A.J.C. Bose Road,

Kolkata - 700020

Tel: +91-33-22876617/ 8839,

22800008, 22831411

Fax: +91-33-2287 0728

E-mail: [email protected]

PUNEMr. L. Shivakumar

Mobile: 9821086490

5A, 5th Floor, Symphony,

S. No. 210, CTS 3202,

Range Hills Road, Shivajinagar,

Pune-411 020

Tel : +91- 20- 25561194,

25560195/196,

Fax : +91- 20- 2553 9231


GURGAON

Mr. Vivek Mathur

Mobile: 9871221122

Building No. 8, 2nd Floor,

Tower A, DLF Cyber City, Phase II,

Gurgaon 122002

Ph: +91-124-4545300, 4545800

Fax; +91-124-4545350


AHMEDABAD

Mr. Animesh Bhabhalia

Mobile: 9824029432

907 & 908 Sakar -II, Ellisbridge,

Ahmedabad- 380006

Tel: +91-79-26585049/2008/5494,

Fax:+91-79- 2648 4924


BANGALORE

Mr. Jayanta Chatterjee

Mobile: 9845022459

'The Millenia', Tower B,

Unit No. 1004, 10th Floor,

Level 2, 12-14, 1 & 2, Murphy Road,

Bangalore - 560 008

Tel: +91-80-43326400,

Fax: +91-80-43326409

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ICRA LimitedAn Associate of Moody's Investors Service

CORPORATE OFFICE

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Tel: +91 124 4545300; Fax: +91 124 4545350

Email: [email protected],Website: www.icra.in

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3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065

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